Planning for 2nd IP and PPOR.

Dear all,

I am a first time poster seeking for investment advice.

I am currently renting at the moment and I own an IP in Brisbane. The IP was purchased back in mid 2013 at $380K. Current value of the IP unknown and I still owe $370K. The loan structure of this IP is interest only with 100% offset. I currently have $30K in this offset account. This IP is negatively geared but become cash flow positive after tax benefits.

My goal within the next 3 years is to own another IP of around $450K (5% deposit with LMI inclusive) and also a PPOR.

My parents will be giving me $25K in early 2015 to use towards either the 2nd IP or PPOR.

I would like advice from you guys to make sure all money is used wisely with maximised tax benefits. Here's my questions:-

1. My preference is to obtain the 2nd IP before getting a PPOR. Is this strategically correct keeping in mind of the 3 years' time frame? Would the bank refuse to lend me money for the PPOR knowing I have 2 IP worth of debts?

2. Should I ask the bank to give me a valuation on my current IP? If the value has increased, should I use the equity as the purchasing cost for the 2nd IP? I believe the current value of my IP is no more than $410K. Also, is there a minimal increase in equity before the bank would consider refinancing the equity?

3. The bank I am using now gave me a pre-approval for up to $520K towards my 2nd IP, and told me I could have a little bit more than $600K if I cancel my current credit card. I haven't check what other banks can offer, but is it wiser to use the same bank or different one?

4. Anything else you can think of that I should do to achieve my goal?

Thanks guys and happy new year :)

Kingsley
 
Dear all,

I am a first time poster seeking for investment advice.

I am currently renting at the moment and I own an IP in Brisbane. The IP was purchased back in mid 2013 at $380K. Current value of the IP unknown and I still owe $370K. The loan structure of this IP is interest only with 100% offset. I currently have $30K in this offset account. This IP is negatively geared but become cash flow positive after tax benefits.

My goal within the next 3 years is to own another IP of around $450K (5% deposit with LMI inclusive) and also a PPOR.

My parents will be giving me $25K in early 2015 to use towards either the 2nd IP or PPOR.

I would like advice from you guys to make sure all money is used wisely with maximised tax benefits. Here's my questions:-

1. My preference is to obtain the 2nd IP before getting a PPOR. Is this strategically correct keeping in mind of the 3 years' time frame? Would the bank refuse to lend me money for the PPOR knowing I have 2 IP worth of debts?

2. Should I ask the bank to give me a valuation on my current IP? If the value has increased, should I use the equity as the purchasing cost for the 2nd IP? I believe the current value of my IP is no more than $410K. Also, is there a minimal increase in equity before the bank would consider refinancing the equity?

3. The bank I am using now gave me a pre-approval for up to $520K towards my 2nd IP, and told me I could have a little bit more than $600K if I cancel my current credit card. I haven't check what other banks can offer, but is it wiser to use the same bank or different one?

4. Anything else you can think of that I should do to achieve my goal?

Thanks guys and happy new year :)

Kingsley

Hi Kingsley,

1. Your ability to purchase a PPOR will depends on your income and expenses, as well as what happens to interest rates between now and purchase time. If you post some basic details of your income, debts, and rental income, brokers here can you give you a guide of whether you can borrow enough.

2. Go for it, get a valuation done from your current lender (who is it?). Its unlikely to have moved that far in such a short space of time, but i've certainly seen it before (in Sydney it hasnt been uncommon to see large gains in short periods). If there is usable equity (ie if the bank allows you to borrow it), then use it to fund your next IP. This will make this 'borrowed equity' deductible. Use cash for PPOR.

3. Which bank are you with now? You can borrow more by switching lenders at the right times.

4. Use cash/offset funds for your PPOR purchase. Pay it down, and then releverage to fund IPs. This will maximise tax deductions, as you'd be switching non-deductible debt to deductible debt.

Cheers,
Redom
 
How did you borrow $370k for a $380k purchase?

I suggest you hold off with the parents for the moment, but get some tax advice. You want to borrow 103% for all investments and keep the cash for the PPOR purchase.
 
Hi Kingsley,

1. Your ability to purchase a PPOR will depends on your income and expenses, as well as what happens to interest rates between now and purchase time. If you post some basic details of your income, debts, and rental income, brokers here can you give you a guide of whether you can borrow enough.

2. Go for it, get a valuation done from your current lender (who is it?). Its unlikely to have moved that far in such a short space of time, but i've certainly seen it before (in Sydney it hasnt been uncommon to see large gains in short periods). If there is usable equity (ie if the bank allows you to borrow it), then use it to fund your next IP. This will make this 'borrowed equity' deductible. Use cash for PPOR.

3. Which bank are you with now? You can borrow more by switching lenders at the right times.

4. Use cash/offset funds for your PPOR purchase. Pay it down, and then releverage to fund IPs. This will maximise tax deductions, as you'd be switching non-deductible debt to deductible debt.

Cheers,
Redom

Hi Redom,

Thanks for your prompt reply.

Just a bit more info about my financial situation:-
Income: $82K annually
Debt: $370K IP loan with Bankwest @ 4.91% IO 100% offset
Credit Card: $16.5K limit with CBA. Always pay off in full.
Rental income for current IP: $360 per week
Rental income for 2nd IP: Hoping for $350-400 per week for a $450K property in Brisbane.

I estimated the current value of my IP to be $410K. This is solely a guesstimate figure. I had a look at the real estate website and saw similarly built house within 1km radius of my IP selling at that figure.

Hope these info helps :)

Thanks again.
 
No problem.

Just plugged some of those figures numbers (conservatively) into one of the more generous lenders calculators and got a figure around 430k in terms of borrowing cap for your PPOR AFTER you purchase your next IP.

You could make a few tinks and stretch this out another 50-100k (reduce credit limits, fix to lower rates, purchase your next IP with a better yeild etc.)

Hope this helps mate. Going to Bankwest for all your deals will definitely reduce this amount. Its because Bankwest will treat the debt (from 1/2 IP's)you already hold with them much more harshly than other lenders (e.g. Macquarie, NABbroker). The numbers above are based on switching lenders.

Best to talk to a broker and flesh it out a finance plan to match your property goals more precisely before moving ahead.

Cheers,
Redom
 
How did you borrow $370k for a $380k purchase?

I suggest you hold off with the parents for the moment, but get some tax advice. You want to borrow 103% for all investments and keep the cash for the PPOR purchase.

Good question and I don't really know the answer. That was my first IP and I didn't know enough by then. I had 5% deposit and If I remembered correctly, 2% of the 5% went to LMI, 2% actual deposit, and the remaining 1% some other charges and fees.

Maybe I will give my documents a good look today after work and see what happened.
 
How did you borrow $370k for a $380k purchase?

I suggest you hold off with the parents for the moment, but get some tax advice. You want to borrow 103% for all investments and keep the cash for the PPOR purchase.

I assume a high LVR (95+) loan? Hence bankwest as the original lender choice back in 13'.

Cheers,
Redom
 
Good question and I don't really know the answer. That was my first IP and I didn't know enough by then. I had 5% deposit and If I remembered correctly, 2% of the 5% went to LMI, 2% actual deposit, and the remaining 1% some other charges and fees.

Maybe I will give my documents a good look today after work and see what happened.

Note, it'll be much harder getting this type of loan in 2015 than 2013. 95%+capitalised LMI on an investment deal at I/O - its still possible, but much harder to get approval.

As you grow your portfolio, it may become more and more difficult as your file weakens.

May need to increase deposit size via equity/cash for later purchases.

Cheers,
Redom
 
Rental income for 2nd IP: Hoping for $350-400 per week for a $450K property in Brisbane.


Why? What is your strategy?

At that yield you are going to be spending a LOT of your own money to keep it. Why would you do that when you can get something that costs you a lot less to hold and will still have capital gains.
 
Note, it'll be much harder getting this type of loan in 2015 than 2013. 95%+capitalised LMI on an investment deal at I/O - its still possible, but much harder to get approval.

As you grow your portfolio, it may become more and more difficult as your file weakens.

May need to increase deposit size via equity/cash for later purchases.

Cheers,
Redom

Agree. The 95% IO pre approval I got from Bankwest for the 2nd IP doesn't seem to allow me to include LMI. I will have to talk to the bank and see if I can negotiate to capitalize LMI.
 
Rental income for 2nd IP: Hoping for $350-400 per week for a $450K property in Brisbane.


Why? What is your strategy?

At that yield you are going to be spending a LOT of your own money to keep it. Why would you do that when you can get something that costs you a lot less to hold and will still have capital gains.

Really not much of a strategy I'm afraid. I am buying from this suburb because it is closer to the community that my parents will be happy to live in, shall they decide to move into this property in the future (7-10 years time).

$450K can only get a rather "cheap and old" looking sort of house in that particular suburb with median house price approximately $470K. So I'm not expecting the rental return to be very good.

But looking at API magazine, the annual growth of the suburb I'm interested in is 11% and rental growth 4.7%. If that numbers are true, and if I purchase the 2nd IP in that suburb next year, I can expect it to give me positive cash flow in 2020. A long way to go...
 
Agree. The 95% IO pre approval I got from Bankwest for the 2nd IP doesn't seem to allow me to include LMI. I will have to talk to the bank and see if I can negotiate to capitalize LMI.

Hmm yeah, not surprised. Try Westpac if it doesn't work for you, may have some luck there.

Cheers,
Redom
 
Agree. The 95% IO pre approval I got from Bankwest for the 2nd IP doesn't seem to allow me to include LMI. I will have to talk to the bank and see if I can negotiate to capitalize LMI.

Hey Kingsley

Welcome aboard.

Unfortunately Bankwest's preapprovals generally aren't worth the paper they're written on.

95% deals are going to need to pass pretty harsh credit scoring and QBE (the LMI provider).

Having said that - they're still doing these deals. Just had one formally approved before Christmas (and it only took two days which is a minor miracle! They are typically quite slow but have approved their turnaround times of late.)

Cheers

Jamie
 
I will have to talk to the bank and see if I can negotiate to capitalize LMI.

Policy will either allow it or not, so its not a negotiation thing per se

BWA policy generally does allow capping of LMI ( with no limit) , but as alluded to by others the chance of getting 2 through in quick time is slim.

The pre approval hasnt helped you either, unless you use it within a very short time frame. It will just result in another dead enquiry on your file, adding further weight to a decline.

Pre approvals in my view should only be used where you have no finance clause ( ie auction or unconditional contract)


just my view of course, but I see too many bankers and brokers do pre approvals to get clients "off the market", with little knowledge and sometimes little regard as to what it actually does to a borrowers file

ta

rolf
 
Just a quick update. I got Bankwest to get me a valuation on my IP and it came out to be $400K. But he said I couldn't use the increased equity to fund my 2nd IP as the overall LVR is still above 90% (currently 91%).

So I guess I will have to use the cash in my offset account plus the funds my parents going to give me to get the 2nd IP.
 
Just a quick update. I got Bankwest to get me a valuation on my IP and it came out to be $400K. But he said I couldn't use the increased equity to fund my 2nd IP as the overall LVR is still above 90% (currently 91%).

So I guess I will have to use the cash in my offset account plus the funds my parents going to give me to get the 2nd IP.

Get tax advice before doing that.
 
Kingsly,

You are asking all the right questions.
However,
How much have you thought about the second purchase?. In the suburb where your parents want to live.

Is that necessarily the best place to put your money?
Also the fixer upper will require work. If you slumlord it you can expect higher vacancy rates.

With your level of debt and low buffer and relatively low debt cover with you income. There is a house of cards under construction here. Not unmanageable from the financial planning perspective. However you want to be spot on with your asset selection. Buy something that will sell easily incase interest rates shot up 3-4 years from now. Buy a quality asset, respect your money.

You seem to be adept at getting into trouble, but make sure there is a back door escape hatch if things go wrong, job ,health ect.

A lot of building wealth through property is managing the downside risks so you can last though the touch times (market & personal).

Is the second IP your ego, or are you going to find a property that will deliver strong capital growth. Cagrowth is where your profit is, the income is just paying the interest.

Cheers,

Jerry Parker
 
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